Macy's Results Rain On Holiday Parade -- WSJ

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01/11/2019 | 02:49am EST

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By Sarah Nassauer

Macy's Inc. and other mall-based retailers said sales petered out at the end of the year as they continued to lose customers to discounters and e-commerce, highlighting how not all chains are positioned to benefit from a strong U.S. economy.

The year-end results -- and a weak profit outlook from Macy's -- clouded what have been upbeat expectations for the holiday sales season with consumers showing a hearty willingness to spend.

"The holiday season began strong -- particularly during Black Friday and the following Cyber Week, but weakened in the mid-December period," Macy's Chief Executive Jeff Gennette said.

The negative sentiment weighed on shares of discounters like Target Corp. and Costco Wholesale Corp. -- and yet they have posted strong holiday sales. Those chains, which are less dependent on apparel, and Amazon.com Inc. have been taking market share from department stores. Target cited strong demand for toys and baby products along with seasonal gifts.

"The rising tide of retail sales hasn't floated all boats," said Neil Saunders, managing director of research firm GlobalData. "We are seeing a polarization between winners and losers."

Macy's said total comparable sales rose 1.1% during November and December. The chain lowered its sales and profit forecasts for the fiscal full year, which ends in February.

The retailer has been investing in a group of stores it calls magnets, adding new lighting, fixtures, a better assortment of merchandise and technology, while trying to shrink less-promising locations. But the changes weren't enough to accelerate growth through what was expected to be one of the most successful holiday seasons in years.

"It's almost as if Macy's is two companies," Mr. Saunders said, noting that the magnet stores have been doing well while the rest of the chain has struggled. "The other stores are dispiriting and crammed with stock, " he said. "That is the issue that Macy's has got to get to grips with."

Kohl's comparable sales rose 1.2% in November and December, but its growth was slower than in the year-earlier period. The company also said it would close two stores and offer a voluntary retirement program for workers over 55. The company sells merchandise similar to Macy's, though its stores typically aren't located in enclosed malls.

"The traditional department stores' days are numbered unless they change radically," said Craig Johnson, president of Customer Growth Partners, a retail research and consulting firm. Many department stores are tied to a format established in the mid-1800s, but consumers now want value, entertainment or services when heading to stores, he said. "If you can't succeed in an environment like this, a strong economy, it's a problem."

Target's sales, including in-store and online, rose 5.7% between Nov. 4 and Jan. 5. The result compares with 3.4% growth in the year-earlier period and puts Target on track for its biggest annual sales gain in 13 years, the company said Thursday. Costco reported late Wednesday that its sales climbed 7%, excluding gasoline and currency fluctuations, in the five weeks ended Jan. 6. Both retailers said strong store traffic drove growth over the holidays.

Target and Costco, as well as larger rival Walmart Inc., have reported strong sales in recent quarters as they have benefited from low unemployment and U.S. wage gains.

Their success suggests that those retailers that worked to attract more shoppers online or invested in store operations were able harness robust consumer spending over the holidays, even as a stock-market swoon and a government shutdown led some investors to worry about an economic slowdown.

Like Walmart, Target has shifted its focus toward growing online, offering more options to receive web orders at home or pick up those orders in stores. Target's online sales grew 29% over the holidays. Costco has worked to keep prices for its bulk goods low and expanded its online product selection.

Bed Bath & Beyond also reported encouraging results, saying late Wednesday that it was ahead of schedule on improving profit margins. Same-store sales at the home-goods retailer continued to decline, but its shares defied the sector downturn Thursday, rising more than 16%.

Some retailers have continued to struggle as shopping shifts online. Traffic to physical stores fell 3% between Nov. 18 and Dec. 29, according to ShopperTrak, which uses cameras to track shoppers in stores.

On Tuesday, department-store operator J.C. Penney Co. said comparable sales fell 3.5% in the nine weeks ended Jan. 5 and that it planned to close more stores this year after a stretch of weak sales figures. L Brands said comparable sales for its Victoria's Secret brand declined during the holiday season and margins suffered, sending its shares down 4.5%.

Target on Thursday said Cathy Smith, who joined the retailer as chief financial officer in 2015, will retire. The company has hired a search firm to find a successor and said is considering internal and external candidates. Ms. Smith plans to stay in her role until a successor is named and act as an adviser until May 2020.

The company left its financial guidance unchanged, with comparable sales growth for the current quarter expected to register at about 5% and full-year earnings pegged at $5.30 to $5.50 a share.